2021-2026 Victorian EDPR Presentation to AER Public Forum from community organisations April 2020 Authored by the Brotherhood of St Laurence with input from Victorian Council of Social Service and Renew Analysis by Headberry Partners
2021 Victorian EDPR – AER Public Forum – Community Organisations Contents 1 4 Summary 2 7 About this presentation 3 7 Affordable distribution costs remain critical for vulnerable consumers 4 8 Revenue trends show the need for further cost savings Without the current low cost of capital, the distributors’ proposed revenue would be higher 8 than in the current period 10 The Regulatory Asset Base is continuing to grow, locking in future costs for customers Reliability continues to improve, while customers do not indicate a willingness to pay for 13 ongoing improvements Distribution assets are being used less – the average capacity of infrastructure exceeds our 13 needs 5 14 Forecasting The total growth in energy consumption is forecasted by most distributors to increase, 14 contradicting AEMO forecasts and recent trends 6 15 Augmentation expenditure Distributed Energy Resources (DER) capacity augmentation should demonstrate the best value for solar and non-solar customers – the current proposals raise the following 15 questions 7 17 Replacement expenditure Replacement expenditure (repex) to reduce the risk of outages is not likely to be in line with 17 customer preferences In previous resets, distributors have generally proposed more repex allowance than was 18 required - this indicates a case for lower repex allowances EPA noise regulations should not lead to capex where there has been no real-world 18 demonstration of material noise issues associated with distribution infrastructure 8 19 Non-network and IT capex 19 This year’s proposals maintain non-network and IT spending at historically high levels 9 20 Operational Expenditure Productivity trends do not indicate that 2018 is an efficient base year for all networks 20 2
2021 Victorian EDPR – AER Public Forum – Community Organisations A wide range of step change increases to operational costs are claimed by some networks, 20 with few step change decreases volunteered 10 Customer engagement 21 21 All distributors undertook expanded customer engagement programs The growth in revenue (where the influence of the low cost of capital is controlled) does 22 not reflect customer preferences There is value in undertaking a full assessment of the AusNet proposal negotiated through 22 the NewReg trial 11 Accommodating the impact of the COVID-19 pandemic 23 23 Energy Networks Australia (ENA) Relief Package Potential for network revenue pathways to be adjusted to support economic recovery 23 after the COVID 19 shutdown Networks recognise the importance of flexibility to accommodate revised forecasts, as the 23 situation develops 12 References 24 This project was funded by Energy Consumers Australia (www.energyconsumersaustralia.com.au) as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas. The views expressed in this document do not necessarily reflect the views of Energy Consumers Australia. 3
1 Summary The Brotherhood of St Laurence (BSL), with Renew and Victorian Council of Social Service (VCOSS), have prepared this joint presentation to the Australian Energy Regulator (AER) in order to represent consumers in the 2021 Victorian electricity distribution price reset (EDPR), recognising the importance of distribution spending in maintaining an affordable and sustainable electricity supply. This document replaces a presentation that was to be given to an AER event cancelled due to COVID-19. This presentation introduces findings from our research that complement and add to the AER’s March Issues paper – it does not encompass all issues that we plan to address in our submission, and it focusses on the distributors’ initial proposals, rather than questions raised in the Issues Paper. This presentation raises the following issues: Revenue trends show the need for further cost savings • The decrease or levelling-off in the distributors’ revenue depends on the current low cost of capital – relative to the cost of capital, revenue is increasing. This is an argument for close scrutiny of cost claims for capex and opex, to deliver affordability over the long term, that does not rely on a low cost of capital. • The regulatory asset base (RAB) is continuing strong growth in absolute terms for all networks, as well as relative to customer numbers and peak demand for most networks. This suggests there is a case for close scrutiny of all capital expenditure contributing to this growth. • The steady improvement in key reliability indicators is at odds with the strong message from customers that reliability is sufficient, and they are not willing to pay more for ongoing improvements. This demands close scrutiny of proposed replacement and augmentation expenditure intended to increase reliability. • Low utilisation, in combination with improving reliability, suggests that investment in network infrastructure exceeds that needed to serve customer requirements. This demands close scrutiny of revenue – in particular augmentation expenditure and operational step changes. Forecasting • Forecast growth in total energy consumption is at odds with AEMO forecasts and recent trends – associated proposals for augmentation should be considered carefully. Investment to integrate distributed solar • Given the likely introduction of a dynamic feed-in tariff (FIT), a re-evaluation of the economic value of proposed augmentation reflecting the dynamic value of exported solar will provide a more reflective indication of value 4
2021 Victorian EDPR – AER Public Forum – Community Organisations • Two significantly different approaches to valuing DER exports are used by different businesses. Because this value is fundamental to determining how much expenditure is efficient, a more consistent approach is required. • Proposals currently differ significantly in their smart grid and their augmentation aspects – consumers will be best served by an EDPR process that advocates a consistent approach. • There is a case for networks with less forecasted solar to defer most augmentation investment until the next period, while optimal solutions are developed by those facing constraints today Replacement expenditure • Repex to avoid component failure, without a credible associated safety risk, is unlikely to be a reflection of customer preferences, and should be closely scrutinised. • Historical repex expenditure has generally been significantly less than proposed and allowed amounts – this flags repex as an area for careful scrutiny, and does not support the adoption of more-conservative asset evaluation approach Environmental Protection Authority (EPA) noise regulations • Without evidence to support the need to upgrade zone substations to protect the public or the environment, government and regulators should work with the EPA to revise draft regulations to clarify that these works are not required for compliance with environmental laws. Non network and IT capex • Non-network investment projects that could be deferred from this period would allow this category of expenditure to decrease from historical highs. Operational expenditure • Issues raised: opex partial productivity factor trends show a decline over the last decade for most networks, indicating the potential for establishing a more efficient base year, or ongoing productivity improvement targets • Issues raised: Some distributors have applied for a high number of step change increases to operational costs. AusNet Services has demonstrated the capacity for networks to absorb some of these costs. There is an absence of identified step change decreases, that could serve to balance proposed increases. NewReg process, and evaluating AusNet’s proposal • There is value in undertaking a full detailed assessment of AusNet’s negotiated proposal: as a pilot, it is useful to gain a full sense of what aspects can be usefully negotiated through this type of process, and what can’t; some areas, such as solar integration augmentation, are new, and comparison between networks is useful to work towards a consistent and optimal outcome for Victorians; changed circumstances, due to the COVID 5
2021 Victorian EDPR – AER Public Forum – Community Organisations 19 pandemic, may require significant revisions to underlying assumptions such as customer number trends, and willingness to pay for non-core services Impacts of the COVID 19 Pandemic • Significant adjustments to proposals may be required once there is more certainty around the social and economic impacts of the COVID 19 pandemic. 6
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